INVESTING IN THE markets has been challenging in the past one year and more so in recent months. While local cues in terms of GDP growth, indirect tax reforms and lower inflation have been supportive, global factors and their impact on the economy and corporate earnings appear adverse.
Trade tariffs, greater push to regionalisation, rising yields and a general global slowdown due to factors such as supply chain disruptions as well as geopolitical tensions are affecting domestic companies, especially exporters.
Volatility may well be the norm in the markets in the near to medium term.
Given this background, investing in proven conglomerates—business groups with operations in many industries—may be a suitable move given the diversification they provide.
Conglomerates tend to have deep pockets, captive financing arms, economies of scale, lower cost of capital and the ability to have operational integration, giving them considerable advantages and business resilience. Also, as corporate earnings decelerate, it may be safer to stick to conglomerates as they tend to enjoy more stable cashflows.
Given that conglomerates span all market capitalisations, they lend themselves to a flexicap investment approach.
Smooth sailing with conglomerates
The first key reason for investing in well-entrenched business groups or conglomerates is the financial strength they enjoy due to the deep pockets they have develop over the decades. This gives them the ability to expand outside their current operations and explore entry to sunrise sectors such as semiconductors, renewable energy, electric vehicles and the like.
A large balance sheet with high operating cashflows ensures that these business groups are able to fund their own capex (an entry barrier) and strengthen their presence in key markets.
Conglomerates, due to their deep pockets, are able take advantage of weak business/economic cycles by engaging in mergers and acquisitions, consolidation, government divestment, National Company Law Tribunal restructuring and so on.
The second key advantage with conglomerates is their low cost of capital. For example, conglomerates in the hospitality, jewellery, pharmaceuticals, real estate and power businesses enjoy high AA+ or AAA credit ratings and thus pay lower interest rates on debt. Non-conglomerate companies in the same industries have lower credit ratings.
The third key factor that is in favour for large business groups is their ability to have their own captive financing arms. There are examples in the automotive, housing and retail spaces of large captive conglomerate financing. This captive financing ensures control over funding terms, cost advantages and customer conversion.
The fourth beneficial factor for large business groups is their ability to integrate their operations. They have the ability to have forward, backward or adjacent business integration based on their requirements. An end-to-end value chain offering becomes possible.
Finally, the fifth favourable aspect of conglomerates is their economies of scale. This allows them to work at lower costs, higher efficiency and deliver on quality.
A large customer base allowing cross-selling opportunities, ability to retain top talent, strong technology tie-ups, shared infrastructure and resources leading to cost reductions and better utilisation rates, and the chance to participate in public-private partnerships are advantages that economies of scale give.
Their diverse revenue stream and resilience give conglomerates the ability to survive even when business cycles are adverse.
Now is the time
The year-on-year growth in sales and net profits of BSE 500 companies in September 2024, December 2024 and March 2025 quarters have been in single digits.
It may thus be smarter to consider investing in conglomerates as they tend to have larger and stabler cashflows.
Conglomerate Investing via Mutual Funds
For lay investors, investing directly in conglomerates can be challenging, as it demands detailed knowledge about companies, sectors, business segments, financials and ongoing developments. Conglomerate themed mutual funds simplify this by offering exposure to such companies through a professionally managed portfolio. Accordingly, investors may consider the ICICI Prudential Conglomerate Fund.
The writer is Managing Partner of Investory Asset Services.